Marcellus Shale exports could transform global LNG market

In energy-hungry countries, all eyes are on Pennsylvania's Marcellus Shale gas. In a dramatic shift from just five years ago, the United States is looking to export, instead of import, natural gas. And if more natural gas starts getting shipped abroad, Pennsylvania's Marcellus Shale could help change the global market for natural gas, and light homes in Tokyo.

The U.S. currently has two export terminals, one in Sabine Pass, La., and the ConocoPhillips LNG export terminal in North Cook Inlet, Alaska. The Department of Energy just gave preliminary approval for ConocoPhillips to expand their Freeport, Texas, import terminal to export liquefied natural gas. About 17 other export proposals now await approval by the DOE, including the Cove Point liquefied natural gas import terminal operated by Dominion Resources.

The 'sweet spot' yields a glut

In areas of northeast Pennsylvania, drillers say they've hit the "sweet spot." In a drill rig several stories above a Susquehanna County farm, gas workers guide a giant diamond drill bit, about the size of a basketball, as it cuts through the rock thousands of feet below. Steve MacDonald is in charge of this operation for Cabot Oil and Gas.

"This is what we call our dog house. This is the command center of our operations up here," MacDonald said. "This is our driller, Mr. Reed, here. He shows you how fast we're drilling, how fast we're pumping, so he understands what's going on downhole."

Downhole in places like this Cabot Oil and Gas well, the company has struck gold, so to speak. Cabot's natural gas production volumes and profits soared in 2012, exceeding all expectations.

And because of wells like these in Pennsylvania's Marcellus Shale formation, a glut of natural gas has developed nationwide. Domestic prices for natural gas have dropped about one-third, since July 2008, before the shale boom really took off.

But overseas, prices are three or four times that, so drillers here want to ship their gas abroad. The economist for the American Petroleum Institute, John Felmy, said exporting Marcellus Shale gas makes sense.

"Because it's such a vast deposit," Felmy said, "and developing it, of course, can be used to supply other states as we're doing now. But there's likely to be so much of it that exporting it at a very good price would help in terms of keeping production going."

As the price has dropped, production in some of Pennsylvania's gas fields has tailed off.

Pipelines lead to idled import terminal

In what some call a stroke of luck, the wells across Pennsylvania could easily be connected to an existing interstate pipeline system, which links up to a nearby import terminal.

That import facility lies about 320 miles south of Susquehanna County, on a spit of land jutting out into the Chesapeake Bay, where large white cylindrical tanks are surrounded by a network of 32-inch pipes. The Cove Point liquefaction plant is operated by Dominion Resources. And Dominion also owns and operates a pipeline system that connects these tanks to Pennsylvania's gas fields. It was only a couple of years ago when plans for that system were to use it for storage and transport between different markets on the East Coast. Today, the company wants to reverse the flow, transporting shale gas to their export facility in Lusby, Md.

The onshore liquefaction plant sits surrounded by a nature preserve. To get to the offshore dock, visitors have to head down into a tunnel and use a bicycle to travel beneath the water to the pier that lies out in the middle of the Chesapeake Bay.

Before any natural gas gets shipped overseas, it has to be cooled to minus 260-degrees Fahrenheit, the point at which it becomes liquid. Export plants that liquefy the gas cost billions of dollars to build, so what they want to do at Cove Point's idled import facility is spend the relatively bargain basement price of $4 billion to convert it to an export facility.

The last time a ship docked at this pier was on New Years Day 2011. Since then, the seagulls have moved in and made it home. Hideaways beneath large pipes hold nests with chirping chicks. A nearby dump provides scraps of food, which the nesting birds bring back safely to this deserted pier, leaving the white-washed dock littered with chicken bones and bird poop.

Dominion Resources spokesman Dan Donovan said this facility would make one of the best places in the country to export natural gas.

"We have a world-class dock and pier," Donovan said. "We have the storage, we have a pipeline into what is now the second largest natural gas field in the world."

Donovan's point about the pipelines is key.

The company's plan for its pipeline system used to be to pump imported natural gas to states such as New York, New Jersey and Ohio. But its plans have changed almost overnight.

"No one saw this coming," Donovan said.

Fukushima and the shale gas reversal

Dominion wasn't the only industry player surprised by Marcellus Shale production.

Wolfgang Moehler is the director of global LNG, the shorthand for liquefied natural gas, for the firm IHS Global.

In "2007, 2008, the assumption was that the U.S. would become, in the next 10 years, the largest gas importers in the world," Moehler said.

But today, that assumption has been turned on its head, thanks in part to all those productive Marcellus Shale wells, and the March 2011 nuclear disaster in Japan, which changed Japan's energy situation dramatically.

Before the meltdown at the Fukushima Daiichi plant, nuclear energy supplied a third of Japan's needs. Where it once had 50 nuclear reactors, today the country is down to just two.

Moehler is watching a dramatic shift in the global LNG market, partly due to increasing energy needs in developing countries like India and the loss of nuclear energy in Japan.

"So a significant amount of that electricity production had to be substituted from fossil fuel generation," Moehler said.

Japan was already the world's largest importer of natural gas, but since Fukushima, the pace has increased steadily. Moehler said Japan would love to snag some of that cheaper American gas coming from Pennsylvania's gas fields. And Pennsylvania's gas producers would love to sell at a higher price.He explained that importing nations like Japan are locked into long-term natural gas contracts tied to the price of oil.

"The emergence of the U.S. now as a potential importer opened up a competition," Moehler said. Energy companies in countries like Japan "could also go back to their traditional producers and say, 'Well, we have a different opportunity. We have to renegotiate the price.' So Fukushima has a very, very strong impact on Japan's decision-making in that regard."

Shifting global LNG markets

This is how good a deal Marcellus Shale gas seems to companies in Japan. Sumitomo Corporation, a Japanese trading company, and its U.S. affiliate Pacific Summit Energy have agreed to help foot the almost $4 billion bill to convert Cove Point to a natural gas export terminal. That company, along with the U.S. affiliate of India’s GAIL Ltd., have signed 20-year service agreements with Dominion to provide natural gas. Sumitomo has since announced that the exported gas would be sold to Tokyo Gas and Kansai Electric Power.

IHS analyst Wolfgang Moehler said despite current contracts with neighboring countries like Australia and Indonesia, it may still be cheaper for Japanese energy companies to pay for the Cove Point conversion and the extra transportation costs of shipping LNG through the Panama Canal to the Pacific Rim.

But Dominion Resources still has a number of hoops to jump through before it starts piping in Marcellus gas, liquefying it, and shipping it out.

First, the Department of Energy has to approve any deals with non-free-trade countries and determine if they’re in the public good. Dominion’s Dan Donovan said the company is pretty confident its proposal will gain approval from the DOE. The Federal Energy Regulatory Commission also has to weigh in, and the state of Maryland has to issue about 30 different permits.

LNG export opponents

And not everyone is thrilled with LNG exports. American manufacturers don’t like the plan because cheap natural gas has helped domestic factories become more cost-efficient. They say exports would raise prices at home.

On the environmental front, the Sierra Club is challenging the Cove Point plan in court.

Sierra Club attorney Craig Segall said regulators should not turn a blind eye toward the impact of increased production in natural gas fields like Pennsylvania.

"So if that continues, you wind up making these really large national energy policy decisions," Segall said, "not just here [in Cove Point] but cumulatively across all these terminals and never ask this serious question. This implies x percent increased methane emissions, y percent increased wastewater production, and as a result, increased wastewater capacity in the fracking states."

Segall wants the federal government to study the larger upstream impacts.

Natural gas exports may be a good deal for drillers, their investors and landowners who leased their mineral rights. But Segall thinks more thought should be given to Pennsylvanians who get few of the benefits of drilling but most of the burdens.

So what would Segall say to someone living in Tokyo, facing rising energy costs?

Segall said renewables should be pursued. But in the meantime, he has no easy answer.

"But there’s always this question of equity," he said. "There's a question about how do we provide energy globally. And there's the question about who suffers where energy is produced and who wins, upstream in Pennsylvania or anywhere along the supply chain."

Dominion Resources said converting the Cove Point plant will create thousands of new jobs in Maryland and upstream in Pennsylvania.

The company expects the Department of Energy to make a decision on its application by the end of the year.

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